Alphabet Inc. (GOOG) Valuation Report

Intrinsic Value
$1.2T

Value Per Share
$96 -30%

Price Target
$108 -21%

Market Cap
$1.7T

Enterprise Value
$1.6T

Price
$137.36 -2.00%

Adjusted Yield
2.3%

TTM Growth Margin Ratio Yield
Revenue $307B 8.7% 5.3x
Gross $174B 11.1% 56.6% 9.3x
EBITDA $99B 5.8% 32.3% 16.3x
EBIT $84B 12.6% 27.4% 19.2x 5.2%
Profit $74B 23.0% 24.0% 23.0x 4.3%
FCFF $25B 30.5% 8.2% 64.0x 1.6%
FCFE $48B 31.5% 17.2% 35.4x 2.8%
Cost of Equity = 8.8% | Cost of Capital = 8.7%Currency: USD | Updated:
Sector: Communication Services | Industry: Internet Content & Information | Read more...

Alphabet Inc.
offers various products and platforms in the United States, Europe, the Middle East, Africa, the Asia-Pacific, Canada, and Latin America.
It operates through Google Services, Google Cloud, and Other Bets segments.
The Google Services segment provides products and services, including ads, Android, Chrome, devices, Gmail, Google Drive, Google Maps, Google Photos, Google Play, Search, and YouTube.
It is also involved in the sale of apps and in-app purchases and digital content in the Google Play and YouTube; and devices, as well as in the provision of YouTube consumer subscription services.
The Google Cloud segment offers infrastructure, cybersecurity, databases, analytics, AI, and other services; Google Workspace that include cloud-based communication and collaboration tools for enterprises, such as Gmail, Docs, Drive, Calendar, and Meet; and other services for enterprise customers.
The Other Bets segment sells healthcare-related and internet services.
The company was incorporated in 1998 and is headquartered in Mountain View, California..

Full-time employees: 182,502 | HQ: Mountain View
Website: https://abc.xyz

Valuation

Input

‚ěú Revenue Growth

‚ěú EBIT Margins

‚ěú Reinvstment Efficiency

‚ěú Cost of Capital

‚ěú Tax

GOOG Valuation Output

Terminal value

$1.4T

+ PV Terminal Value

$616B

+ PV FCFF

$515B

= Sum of PV

$1.1T

+ Cash

$111B

- Debt

$29B

= Intrinsic Value

$1.2T

Value Per Share

$96

Overvalued by 30% vs its $137 Price

1-Year Price Target

$108 (-21%)

10-Year Fundamental Projections for Alphabet Inc. (GOOG)
YearGrowthSalesEBIT %EBITTaxNOPATReinvestmentROICFCFFWACCPV FCFF
TTM 7.0% $307B 27.4% $84B 14% $72B $25B 36% $25B 8.7% --
2025 7.0% $329B 27.4% $90B 14% $78B $14B 36% $63B 8.7% $58B
2026 7.0% $352B 27.4% $96B 14% $83B $15B 36% $68B 8.7% $57B
2027 7.0% $377B 27.4% $103B 14% $89B $16B 36% $72B 8.7% $56B
2028 7.0% $403B 27.4% $110B 14% $95B $18B 36% $77B 8.7% $55B
2029 7.0% $431B 27.4% $118B 14% $102B $19B 36% $83B 8.7% $55B
2030 6.5% $459B 27.4% $126B 16% $106B $23B 35% $83B 8.7% $50B
2031 5.9% $486B 27.4% $133B 18% $110B $23B 33% $87B 8.6% $49B
2032 5.4% $512B 27.4% $140B 20% $113B $22B 32% $91B 8.6% $47B
2033 4.8% $537B 27.4% $147B 21% $116B $21B 31% $95B 8.5% $45B
2034 4.3% $560B 27.4% $153B 23% $118B $19B 30% $99B 8.5% $43B
‚ôĺÔłŹ 4.3% $584B 27.4% $160B 25% $120B $60B 8.5% $60B 8.5% --
How is GOOG's expected return calculated?

The expected return is a percent (%) estimate of how much a stock's value will change per year. It is used to calculate GOOG's 1-year price target by multiplying the stock's present value with (1 + expected return). The expected return is calculated using a stock's risk (cost of capital), excess returns, and dividend yield.

Expected Return = (1 + Cost of Capital) * (Cost of Capital * (1 + ROIC - Cost of Capital - Dividend Yield))
12.0% = 108.7% * (8.7% * 127.3%)

We exclude dividend payments because they aren't reflected in a stock's price. Note that excess returns are highly dependant on our estimate of invested capital and its return. Neglecting to capitalize expense items such as operating leases, R&D, brand name marketing expenses, may inflate the excess return estimate.

Growth

In the 12 months ending Q4'23 Alphabet Inc. (GOOG) grew revenues by 8.7%, from $283B to $307B - indicating a deceleration of revenue growth. GOOG has a 5-year and 3-year revenue compound annual growth rate (CAGR) of 13.7% and 6.1% respectively.

Revenue Growth Estimates

Sustainable
4.2%
Fundamental
9.6%
Priced-in
8.0%

Bottom Line Growth Estimates

Fundamental Earnings Growth
0.1%
Fundamental EBIT Growth
8.4%
Priced-in FCFF Growth
7.0%

Looking at forward estimates, we can see that the market is pricing-in a 8.0% long-term revenue growth rate, while the financials indicate a future revenue growth rate between 4.2% and 9.6%.

Using the average of these 3 estimates we get a 7.3% long-term revenue growth for GOOG.

What is GOOG's sustainable revenue growth?

Similar to fixed vs variable costs, the sustainable growth rate shows how much we can expect the company to grow based on their reinvestment into the business, excluding variable demand and pricing. This rate may be helpful as a long-term baseline for the company.

(GOOG) has invested $201B in total capital, consisting of $283B in book value of equity, plus $29B in total debt, less $111B in cash & equivalents.
By adding on the average reinvestment of $17B in the last 4 quarters on a TTM basis to the $201B capital base, and applying the current sales to capital ratio of 153.0%, we can expect the company to grow its revenue to $333B, implying growth of 8.4%. However, we assume at least one gap year for CapEx to transform into growth, so we divide the rate by 2 and get a 4.2% sustainable revenue growth.
Use your own judgement based on the type of business since it takes time for reinvestment to yield growth.

What are GOOG's fundamental revenue & EBIT growth rates?

The fundamental growth rates analyze how much (GOOG) is reinvesting into the business, adjusted for the quality of those reinvestments to come up with an estimate for a long-term future growth. Both fundamental and sustainable gorwt rate estimates attempt to use fundamentals in estimating growth.

Alphabet Inc. (GOOG) has reinvested an average of $17B on a rolling TTM basis, reflecting a reinvestment rate of 23.4%, calculated as:
Reinvestment / (EBIT - Tax) a.k.a. NOPAT.
By multiplying the reinvestment rate with the return on invested capital (ROIC) we get a long-term estimate for a growth in EBIT:
23.4% * 36.0% = 8.4% (Reinvestment rate * ROIC)

In order to convert this to a fundamental revenue growth rate, we analyze the relationship between EBIT growth and Revenue growth, and come up with a scaling factor of 114.2%. We then multiply the fundamental EBIT growth estimate by the revenue scaling factor and get an equivalent for a fundamental revenue growth rate of 9.6%.

What FCFF & revenue growth rates is the market pricing-in for GOOG?

In order to justify the current $1.7T market capitalization given a 8.7% cost of capital, GOOG needs to keep growing its un-levered free cash flows by 7.0% across many ( >10 ) years.

GOOG's market implied FCFF growth rate of 7.0% =
1 + (Enterprise Value * Cost of Capital - FCFF) / (Enterprise Value + FCFF) =
1 + ($1.6T * 8.7% - $25B) / ($1.6T + $25B)

By analyzing the relationship between EBIT growth and revenue growth, we get a scaling factor of 114.2% that we apply to our implied FCFF growth in order to get the market implied revenue growth rate of 8.0%

Margins

Gross
56.6%
2.2% YoY
EBIT
27.4%
3.6% YoY
Profit
24.0%
13.2% YoY
FCFF
8.2%
20.1% YoY
Why is GOOG scaling revenues by 3.0% relative to COGS?

GOOG grew revenue by 8.7% in the last 12 months, and their COGS changed by 5.6% in the same period. This means that the company is scaling revenues 3.0% better than costs.

A company that has a scaling rate above 1:1 indicates efficient growth that may translate into added value in the bottom line. Conversely, if the rate is lower, e.g. 1:0.9, it shows that while the company managed to grow, their costs increased more than revenues.

Free Cash Flows

Reinvestment
-$25B
FCFF
$25B
FCFE
$48B
Net CapEx
-$21B
Simple FCFF
$69B
Change in WC
-$3.8B

Note: cash flows in the table and chart are presented as inflows and outflows, meaning that positive numbers indicate how much a company has taken in, and negatives show how much cash has flown out.

What is included in GOOG's $33B capital expenditures?

In the last 12 months GOOG invested $32B in plant property & equipment (PPE) CapEx. By adding the $495M in acquisition expenses, we get a total CapEx of $33B.

How much is GOOG reinvesting into the business?

In the last 12 months ending Q4'23, GOOG made capital expenditures of $33B. By netting out the depreciation of $12B, we get a NetCapEx of $21B, indicating that the company invested in future growth.

Finally, we add on the change in Working Capital of $3.8B, and get a Total Reinvestment of $25B.

By investing more than it depreciates, GOOG is increasing its future growth assets.

How are GOOG's $25B free cash flows to the firm (FCFF) calculated? GOOG's $25,266,000,000.00 Free Cash Flows to the Firm (FCFF) =
$84,293,000,000.00 EBIT
- $11,821,000,000.00 Tax
- $32,251,000,000.00 Plant Property Equipment
- $495,000,000.00 Acquisitions
+ $11,946,000,000.00 Depreciation
+ -$3,845,000,000.00 Change in Working Capital
- $22,460,000,000.00 Stock Based Compensation

Free Cash Flows to the Firm are important because they indicate how much a company has left over for all (debt & equity) investors.
It is a measure of the true bottom line for investors, as opposed to earnings and the simplified version of free cash flows (Cash from operating activities - PPE).

In the last 12 months GOOG had $25B in free cash flows, indicating that the business has managed to create value for investors.

How are GOOG's $48B free cash flows to equity investors (FCFE) calculated? GOOG's $47,975,000,000.00 Free Cash Flows to the Equity (FCFE) =
$73,795,000,000.00 Net Income
- $32,251,000,000.00 Plant Property Equipment
- $495,000,000.00 Acquisitions
+ $11,946,000,000.00 Depreciation
+ -$3,845,000,000.00 Change in Working Capital
+ $28,504,000,000.00 Total Debt today
- $29,679,000,000.00 Total Debt one year ago

Free Cash Flows to the Equity investors show how much the company has left over for shareholders.
It is an insightful metric when paired with FCFF for analyzing companies that have a lot of debt, as it can reveal the effect of interest rates on the value of equity.

When compared to FCFF, they should be roughly in-line, else we need to think about what causes the difference. In the last 12 months GOOG had $48B in free cash flows to equity, indicating that the business can return capital in the form of dividends and buybacks.

Returns

ROE
26.0%
ROIC
36.0%
Sales to Cap
153.0%
How much excess returns (value) is GOOG creating on average (22%), and how to calculate it?

ROE Excess Returns 17.3% = Return on Equity - Cost of Equity
ROC Excess Returns 27.3% = Return on Capital - Cost of Capital

Average Excess Returns = (ROE - Cost of Equity + ROIC - Cost of Capital) / 2

For every 1% of growth in its net and operating income, the value of GOOG's stock changes by an average of 0.22%.

Excess returns are important because they help us estimate a company's target price.

If you are analyzing a company with a lot of R&D expenses, consider capitalizing them as an asset to get a better ROE & ROC estimate - You can use our automated spreadsheet.

Capital Structure

Equity
$283B
Debt
$29B
Cash
$111B
Interest Coverage
273.7x
Debt to EBITDA
0.29x
Debt to Capital
1.6%

Dividends & Buybacks

Adj. Yield
2.3%
Dividends + Buybacks - SBC
FCFE Payout
81.4%
% FCFE paid as Div + Net Buybacks
R-R Upside
-48.9%
FCFE yld. / Cost of Equity - 1

Alphabet Inc. has transferred a total value of $39B to investors in the last 12 months. The required cash return (excluding expected growth) for GOOG is $76B, or a 4.5% yield in the same period.

With an adjusted payout of 81.4%, GOOG seems to be spending an affordable portion of its FCFE.

SEC Filings

Examine the details and validate data:

Historical SEC Filings

Headlines